He was tall, broad-shouldered, with a pointed beard and a bit too distant from society. Frequent holidays to the United States and Canada to escape hidebound London, this figure was part of an exclusive club of global central bankers. Montague Norman, Governor of the Bank of England (1920-1944), was the citadel of the citadels in the global monetary system in the 1920s.
He loved his knee stretched coats, cigars, evening whiskies, read-outs in the country side and escapades across the Atlantic. He seemed more like a courtier from the good old Roman Empire. He had a unique taste in classical music and his house in West London exuded an air of fine craftsmanship. Educated at Eton College and for a year at King’s College Cambridge, when the high life in London failed to desert him, he found solace in the countryside.
At Cambridge, he was a misfit. Perhaps constant brooding in the libraries was a bit difficult to stomach. At athletics, he excelled little, though enjoyed his long reads while watching cricket at Lord’s. He came from a well known family of leading city bankers in London. His father was a partner in the Anglo-American Investment Banking firm Brown Shipley. As I pen this down, the world economy is at a crossroads. Major structural changes are taking place. The sub-prime mortgage crisis is still haunting the credit worthiness of countries in Europe.
Loose monetary policies are being pursued in the US and Japan. Yields in the bond markets are lower. Capital is flying out to emerging markets in search of higher returns. Equity markets also pose an uncertain outlook. China and India are fast emerging as the new players on the global economic scene. Britain faces political challenges as it heads into its fiscal consolidation programme. In the US, the story is no different, with Barack Obama reasserting the significance of his massive asset purchase programme. In short, the situation is highly reminiscent of the Great Depression of the 1930s.
The depression years saw the US, Germany and UK as major casualties. Already hammered by hyperinflation in the early 1920s, production in Germany had dropped by 40 percent. Companies slashed prices by 25 percent. Consumption spending had taken a nosedive. Gangs of unemployed youth had materialised, loitering in the streets of New York, Berlin and Chicago.
To many, that was the end of the world. To many it was the worst thing that could have ever happened to the world. No life was spared. It dried out the ambitions of many and literally crippled an entire generation of an otherwise capable lot. All this came on the heels of the great stock market crash of 1929 in New York. Men of little intellect, debated around street corners about the possible extinction of western style capitalism.
Just as the crises had reached a heightened crescendo by August 1931, the following press statement was issued: “The Governor of the Bank of England has been indisposed as a result of the exceptional strain to which he has been subjected in recent months. Acting on medical advice he has abandoned all work and has gone abroad for rest and change.”
The man clearly had little steam left in him. A policy maker of his rank could feed frenzy in a bubble or stem fears of crisis by simple public statements. Although it was Norman who openly criticised indebting the world in the aftermath of World War I and successfully predicted the stock market bubble brewing in the US, it was his policies that were placed under the gun for triggering that crises of monumental proportions. Britain during WWI was the leading credit provider of the world. The sum total of its foreign investments was $20 billion.
Crisis in Europe meant Britain would have serious problems in recovering its investments. The seeds of British decolonisation had been sown. Soon after WWI, governments decided to leave everything of significance under the mantle of central bankers; chiefly to the Bank of England and the Federal Reserve.
That is why Norman is so central in the mess that ensnared the world economy. This was a time when the foundations of the global financial system rested upon the gold standard. The bullion reserves determined the value of the currencies. Central banks around the globe were required to hold a certain quantity of bullion as backing for paper currency.
Basically interest rate manoeuvring depended on the amount of gold held. At a time of falling prices and low credit growth, restricted levels of gold reserves would obviously hurt both producers and consumers. Norman like many others during his age, thought of gold as a sacred commodity. He failed to factor in the changes British society had gone through during and after WWI. He wanted to return Britain to pre-war gold rates, which demanded sufficient strengthening of the pound.
With unemployment already verging on 10 percent in the mid to late 20s, the decision to strengthen the pound turned out to be disastrous. This moral commitment to keep the gold rate higher than what it should have been concurrently fuelled a low interest rate regime in the US, thereby triggering a stock market bubble, followed by a burst. Bank runs ensued everywhere. Deposits were frozen as the crisis gathered momentum.
Norman, failing to realise the gravity of his decision and the stubbornness of his mental constitution, shipped off to Canada for a vacation. Characters like Montague Norman are often not discussed in commentaries of the great depression. Perhaps he rekindles the excessive darkness and depths faced in that seminal event. Journalists and historians alike remember him as an enigmatic and arty Englishman, whose fickleness sacrificed the socioeconomic fabric of the western society. No wonder that Winston Churchill once said: “I hope we shall hang Montague Norman. If it does I will certainly turn the king’s evidence against him.”
The writer is a Cambridge graduate
